Assessing Large-Cap Semiconductor Stocks: Financial Insights

In our last article, we talked about the semiconductor industry, how it’s doing financially, and what challenges it’s facing. In this blog post, we’ll focus on assessing risks in the semiconductor industry, particularly for big companies known as Large-Cap companies.

Risk assessment is a very important part of fundamental analysis. It helps investors spot potential risks and make well-informed decisions. By looking at different financial measurements, investors can get an idea of how healthy a company is financially and how well it can handle market ups and downs.

The TL;DR (Too Long; Didn’t Read)

1. The blog post analyzes the financial health and investment potential of large-cap semiconductor companies using a point system for various financial metrics.
2. The metrics include profitability, liquidity, debt-to-equity, growth, valuation, and financial health indicators.
3. Outstanding performers:
   • Monolithic Power Systems (MPWR): Excellent ratings in most categories, but high valuation ratios.
   • Texas Instruments (TXN): Excellent profitability and liquidity, but poor growth.
4. Potential risks:
   • Micron Technology (MU): Poor profitability and growth, high EV/EBITDA ratio.
   • Intel Corporation (INTC): Poor profitability, growth, and debt-to-equity ratio, high PE ratio.
5. Mixed results:
   • Arm Holdings (ARM): Excellent liquidity and Altman Z-score, but poor profitability and growth, extremely high valuation ratios.
   • Lattice Semiconductor (LSCC): Excellent profitability, liquidity, and growth, but poor debt-to-equity ratio and high valuation ratios.

Characteristics of Market Capitalization

Market capitalization, or market cap, is a way to measure how much a company is worth based on its stock price. You can calculate it by multiplying the current stock price by the total number of shares available. Companies are grouped into different market cap categories based on their total value.

Here are the main categories and how much they’re typically worth:

1. Mega-Cap
   • The biggest and most well-known companies.
   • Global leaders in their industries.
   • Very large and have businesses in many countries.
   • Usually the most stable and least likely to have big price swings.
   • Typically worth more than $200 billion.
2. Large-Cap
   • Well-known, stable companies.
   • Often leaders in their industries.
   • Less risky than smaller companies.
   • Usually pay dividends to shareholders.
   • Typically worth between $10 billion and $200 billion.
3. Mid-Cap
   • Established companies that are still growing.
   • Riskier but also have more room to grow than large-cap companies.
   • A balance of stability and growth potential.
   • Typically worth between $2 billion and $10 billion.
4. Small-Cap
   • Younger, less established companies.
   • Can grow quickly but also riskier.
   • Stock prices can change a lot and may be affected more by economic problems.
   • Generally worth between $300 million and $2 billion.
5. Micro-Cap
   • Very small companies, often just starting to grow.
   • High risk but potentially high rewards.
   • Harder to buy and sell shares, and prices can be more easily manipulated.
   • Typically worth between $50 million and $300 million.
6. Nano-Cap
   • The smallest companies that are publicly traded.
   • Extremely high risk and very speculative.
   • Not much public information available and hard to buy and sell shares.
   • Usually worth less than $50 million.

In summary, here are the typical value ranges for each category:

• Mega-Cap: Over $200 billion
• Large-Cap: $10 billion to $200 billion
• Mid-Cap: $2 billion to $10 billion
• Small-Cap: $300 million to $2 billion
• Micro-Cap: $50 million to $300 million
• Nano-Cap: Under $50 million

Understanding these categories can help investors figure out the potential risks and rewards of different investments, so they can choose investments that match their goals and how much risk they’re willing to take.

About the tables below;

Before we dive into the analysis, I would like to apologize in advance to readers on smaller screens. The upcoming table may not be as responsive as I would have liked it to be. This is because the pro package for the tables on this blog platform costs around $79 per year and i use the free version. Since this blog is currently a hobby for me and I don’t generate any income from it, I have chosen not to invest in the pro package at this time. However, if this project performs well and gains traction, I do plan to upgrade to the pro package to provide a better user experience for all readers.

Before we start we need to go into the blogs point system and understand what it means, so you can later check the table and understand the tables content and what it means.

Profitability:

Return on Equity (ROE): An ROE above 20% is considered excellent, while an ROE between 15% and 20% is good. Fair ROE ranges from 10% to 15%, and anything below 10% is considered poor.

Return on Assets (ROA): An ROA above 10% is excellent, while an ROA between 5% and 10% is good. Fair ROA ranges from 2% to 5%, and an ROA below 2% is considered poor.

Profit Margin: A Profit Margin above 20% is excellent, while a margin between 10% and 20% is good. Fair Profit Margin ranges from 5% to 10%, and a margin below 5% is considered poor.

Liquidity:

Current Ratio measures a company’s ability to meet its short-term obligations. A Current Ratio above 2.0 is excellent, while a ratio between 1.5 and 2.0 is good. Fair Current Ratio ranges from 1.0 to 1.5, and a ratio below 1.0 is considered poor.

Quick Ratio, also known as the acid-test ratio, is a more conservative measure of liquidity. A Quick Ratio above 1.5 is excellent, while a ratio between 1.0 and 1.5 is good. Fair Quick Ratio ranges from 0.5 to 1.0, and a ratio below 0.5 is considered poor.

Debt to Equity: Debt to Equity ratio measures a company’s financial leverage. A Debt to Equity ratio below 0.5 is excellent, while a ratio between 0.5 and 1.0 is good. Fair Debt to Equity ranges from 1.0 to 2.0, and a ratio above 2.0 is considered poor.

Growth:

Revenue Growth, EPS Growth, and Free Cash Flow Growth are important indicators of a company’s growth potential. Growth above 20% is considered excellent, while growth between 10% and 20% is good. Fair growth ranges from 5% to 10%, and growth below 5% is considered poor.

Valuation:

Price-to-Earnings (PE) Ratio, Price-to-Book (PB) Ratio, and EV/EBITDA are valuation metrics that vary by industry. It is essential to compare a company’s valuation ratios to its industry peers and the market average to determine whether the stock is overvalued, undervalued, or fairly valued.

Financial Health:

Altman Z-Score is a measure of a company’s financial health and bankruptcy risk. An Altman Z-Score above 2.99 is excellent, while a score between 1.81 and 2.99 is good. Fair Altman Z-Score ranges from 1.23 to 1.81, and a score below 1.23 is considered poor.

Piotroski F-Score is another measure of a company’s financial health, focusing on profitability, leverage, liquidity, and operating efficiency. A Piotroski F-Score of 8 or above is excellent, while a score between 6 and 8 is good. Fair Piotroski F-Score ranges from 4 to 6, and a score below 4 is considered poor.

As you now can see some keys do contain the values “N/A” which means not applicable, and its used as a filler in my quantative analysis when we don’t have that data.

Analysis of Large-Cap Semiconductor Companies

Outstanding Performers: Monolithic Power Systems (MPWR) stands out with excellent ratings in most profitability, liquidity, and growth metrics. However, it is important to note that MPWR’s valuation ratios are high compared to the industry average, which may indicate that the stock is overvalued.

Texas Instruments (TXN) also performs well, with excellent profitability and liquidity. Despite its poor growth, TXN’s PE and PB ratios are only slightly higher than the industry average, suggesting that the company’s stock price is relatively fair.

Potential Risks: Micron Technology (MU) raises concerns with its poor profitability and growth, despite having excellent liquidity. Moreover, MU’s high EV/EBITDA ratio compared to the industry average suggests that the company may be overvalued, making it a potentially risky investment.

Intel Corporation (INTC) also presents potential risks due to its poor profitability, growth, and debt-to-equity ratio. With a PE ratio higher than the industry average, INTC’s stock price may not be justified by its current financial performance.

Mixed Results: Arm Holdings (ARM) presents a mixed picture, with excellent liquidity and Altman Z-score, indicating strong financial health. However, ARM’s poor profitability and growth, combined with its extremely high PE and PB ratios compared to the industry, suggest that the company may be significantly overvalued.

Lattice Semiconductor (LSCC) also shows mixed results, with excellent profitability, liquidity, and growth. Despite these positive factors, LSCC’s poor debt-to-equity ratio and high valuation ratios compared to the industry average indicate potential risks that investors should consider before making a decision.

And as per usual this is the blogs own subjective analysis upon the presented data.

Readers should keep in mind that this analysis is based on historical financial data and should not be considered as investment advice. It is essential for readers to conduct their own thorough research and consult with financial professionals before making any investment decisions. The information provided in this article is for educational and informational purposes only and should not be relied upon as a sole basis for investment choices.

After reading the post, let me know in the comments which market capitalization category you’d like me to analyze next! I’m considering covering mid-cap, small-cap, or even micro-cap semiconductor companies in future posts. Your input will help me prioritize which category to focus on next.

References:

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